Debt Recovery Funds

Author:Prof. Rita Samoreno Gomes, Duarte Schmidt Lino, Cristiano Dias and Manuel Sequeira
Profession:PLMJ
 
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Law 69/2017, which governs Debt Recovery Funds("DRF"), was published on 11 August 2017 and came into force on the following day. The aim of DRFs is to mitigate the losses incurred (only) by non-qualified investors who acquire financial instruments representing the debt of entities that are insolvent or in a difficult financial situation, when the instruments have been mis-sold by credit institutions subject to resolution actions, or by other entities in a group or control relationship with the entity that is insolvent or in financial difficulty.

This mechanism was created in the wake of the conclusions appearing in the Parliamentary Commission of Inquiry Report on the management of Banco Espírito Santo ("BES") and the Espírito Santo Group ("GES"). Furthermore, the mechanism has the more or less self-confessed objective of being a solution for non-qualified investors in commercial papers issued by GES companies and acquired from the network of branches of the banks BES, BEST- Banco Eletrónico de Serviço Total, SA ("BEST") and Banco Espírito Santo dos Açores, SA ("BAC"). However, it is a mechanism that could make it possible to create other funds intended to compensate investors in other institutions, as long as the remaining legal requirements are met.

In the immediate future, this solution makes it possible to provide compensation for part of the losses suffered by customers of GES who, according to the available information, invested around €434 million in commercial paper issued by Espírito Santo International, S.A. ("ESI") and by Rio Forte Investments S.A. ("Rio Forte"), and who, following the collapse of BES/GES in 2014 lost their investments.

The previous mechanisms to protect non- qualified investors were insufficient, because only small investors were protected by the Investor Compensation System. In turn, this system did not cover investors who acquired debt securities sold at branches of BES, BEST and BAC in the form of commercial paper.

WHAT ARE DEBT RECOVERY FUNDS?

DRFs are closed funds with autonomous assets and without legal personality. Their sole purpose is to acquire debt owed to non- qualified investors arising from or related to the subscription of debt securities issued by entities which, on the date of the sale in question, were insolvent or in a difficult financial situation. The goal of these funds is to make it possible to recover those debts and to mitigate the losses suffered by the customers to whom the money is owed.

In practice, DRFs acquire the debts that are in the situation described in the law and then proceed to recover them, in order to obtain the compensation awarded by the courts or under out-of-court settlements.

Like other funds - such as venture capital funds and investment funds - DRFs are managed by managing bodies and all their assets are entrusted to a depositary. The following may be DRF managing bodies: (i) DRF management companies, a new form of a company incorporated in the form of a public limited company (sociedade anónima) and with a minimum share capital of €125,000;

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